Andersen admits to faulty shredding policy

In a memo designed to convince clients not to leave the firm, the company cites its ambiguous document policy as the main culprit for Enron-inspired charges against it

BLOOMBERG , WASHINGTON

Deputy US Attorney General Larry Thompson, center, joined by Task Force Prosecutor Leslie Cauldwell, left, and Assistant Attorney General Michael Chertoff -- announces the indictments against accounting firm Authur Andersen for destruction of documents pertaining to the US government's investigation of Enron on March 14.

PHOTO: AFP

Arthur Andersen LLP said in an internal memorandum that the firm's policy on handling documents was so imprecise it may have led to shredding of Enron Corp records now at the heart of the auditor's indictment.

The Chicago-based firm's memo was sent to Andersen partners on Thursday, the same day the firm's indictment for obstruction of justice was announced by the Justice Department. The memo was intended for briefing clients on why they should stay with the accounting firm, said a person familiar with the matter. Legal experts say the memo may hurt Andersen's legal defense.

Andersen's "document policy, with its lack of clarity and ambiguities, played a key role in the destruction of Enron-related documents that occurred in the fall of 2001," the firm said in the 14-page memo, obtained by Bloomberg News.

The indictment said Andersen, Enron's auditor, destroyed "tons" of material at four offices after the firm was alerted on Oct. 19 that the Securities and Exchange Commission was looking into Enron. The energy trader collapsed and declared bankruptcy on Dec. 2 amid accusations it distorted its financial record-keeping.

Andersen's memo said the vagueness of the document-retention policy may have contributed to misinterpretation of an e-mail sent by in-house attorney Nancy Temple at the Chicago headquarters.

On Oct. 12, as Andersen's Houston office was discovering inaccuracies in Enron's accounting, Temple joined in the review and inserted language calling the accounting on Enron's Raptor partnerships "inappropriate," the memo said.

Forty minutes later, Temple sent an e-mail to Michael Odom, a senior partner in Houston, reminding him of the document policy, the memo said. Odom forwarded the message to David Duncan, lead partner on the Enron audit who may have interpreted it as instructions to shred documents, Andersen's 14-page memo said.

Andersen's policy calls for storing essential work papers in a central file after an audit. Everything else -- drafts, internal memos and the like -- are to be destroyed as soon as they become "expendable," the memo said.

"There was no clear guidance" when litigation was pending as to "what obligations existed if Andersen was not a party to, but was only a witness in, litigation or government investigation," the memo said.

Temple and Odom didn't return phone calls today.

Admitting a lack of clarity may undercut Andersen's defense that senior officials didn't authorize the shredding by employees in Houston, said Robert Plotkin, a white-collar defense lawyer with Paul Hastings Janofsky & Walker in Washington. Companies typically must show that employees were acting outside the scope of their jobs to defeat criminal charges, he said.

"You have to show that people were acting contrary to clear corporate policies," Plotkin said.

At the time of the Enron investigation, Andersen was under a legal order not to commit any wrongdoing -- part of a settlement with the SEC last June of a landmark case involving Waste Management Inc, the biggest US trash hauler.

Andersen agreed to a US$7 million fine -- then the SEC's biggest against an accounting firm -- and paid US$20 million to settle investor lawsuits alleging the firm issued misleading audits. Andersen also previously paid US$110 million Andersen to settle similar claims by investors in appliance maker Sunbeam Corp.